Another 50 bps. Yawn
Jude Wanniski
January 31, 2001


The market reaction to a 50 bps cut by the Fed today was a big yawn, as the central problem in the national economy is not the level of overnight interest rates, but the drag of the $265 gold price. The market would not have responded much differently if we had seen a 75 bps cut, which looked like a possibility over the last 24 hours as the consumer confidence numbers seemed to indicate more weakening of the economy in the works. If there had not been a 50 bps cut, though, we would have seen a selloff, as the lower rate does help the economy as long as the yield curve remains inverted. With funds at 5.5% and the 30-year bond at 5.54%, we are more or less in the no-brainer stage of Fed policy.

Because the focus of virtually all market commentary is on the Fed's interest-rate target, it really does not help much to have folks like Louis Rukeyser and Larry Kudlow on the Squawk Box today praising each other for having said over the last 18 months that the Fed was too tight. By that, they mean the Fed raised the funds rate once or twice too often, causing the weakness in the economy which they now have to combat with a lower and lower funds rate. Both men have been wrong in their analysis in thinking the funds rate is to blame when it is the gold price. Indeed, Kudlow is worse than being wrong in arguing in recent days that the Fed should NOT ease so much that the gold price would rise above $300 -- the only thing that will alleviate the deflation and turn consumer confidence around. We're still not getting any help from The Wall Street Journal on this score, as this week's WSJ lead editorial on monetary policy indicated. The WSJ argued that tax rates should be cut and interest rates should be cut, but said nothing about the lead balloon of deflation. Neither the Greenspan rate cut nor the Bush tax cuts will have more than palliative effects.

The WSJ is still wary of arguing for a change in the Fed's hapless operating mechanisms to a commodity target. The lead editorial quoted Robert Mundell, who simply advised a cut in the funds rate of NO MORE than 50 bps! Mundell has been predicting the rate cuts would cause the gold price to rise, but thus far has not seen any movement. Gold today FELL by half a dollar. Keynesians and monetarists are not going to argue for such a change. If the most important supply-siders will not get behind such a move, we will have to live with the existing paradigm. I'm conveying my concerns to the handful of people I know in the Bush administration, but there is no chance of a discussion of the deflation as long as there are no complaints from the supply-side's intellectual leaders. President Bush, I'm almost certain, is blissfully unaware of the cancerous knot in the economy that takes little bites out of it every day.